2021 (11) TMI 107 - HC - Income Tax

Recovery of tax - attachment of immovable property - validity of sale of immovable property - right of bonafide purchaser - adequate consideration - 2nd respondent has stated that the immovable property was attached under warrant of attachment - whether transfer affected by the 3rd and 4th respondents in favour of the petitioners is not for adequate consideration? - HELD THAT - As provisions of Section 281(1) of the Act would stand attracted, only when a demand is raised and the same is not paid by the assessee, thereby, becoming an assessee in default. It is only when an assessee is declared as assessee in default and certificate of recovery is drawn up, the protection provided under the said Section 281(1) of the Act would be available. In the facts of the case, it is not shown to this Court that the transfer affected by the 3rd and 4th respondents in favour of the petitioners is not for adequate consideration or that attachment of the subject property has been made before the petitioners had purchased the same. Going by the admission of the 2nd respondent in the impugned order itself, it is evident that warrant of attachment in ITCP-16 was issued for the first time on 04.10.2002. On the other hand, the sale deeds under which petitioners 1, 2 and 4 had purchased the property are all registered on 19.07.1999 and that of the 3rd petitioner on 24.07.1999. Further, it is also to be noted that the order of attachment issued mentions that certificate of recovery has been drawn up only on 02.06.2000, whereby it is held that the3rd respondent has failed to pay the sum as shown therein. As the 3rd respondent is treated as an assessee in default only upon the drawing up of certificate of recovery dt. 02.06.2000, the transfers of immovable property effected prior to the said date in favour of the petitioner cannot be said to be hit by the provisions of Section 281(1) of the Act; consequently, the purchase of flats by the petitioners is a bona fide purchase and are covered by the escape route provided under Section 281(1) of the Act, as held in ICICI Bank case 2019 (3) TMI 701 - TELANGANA AND ANDHRA PRADESH HIGH COURT Thus, the petitioners are entitled to claim the benefit of protection provided under Section 281(1) of the Act in respect of purchase of flats made by them from the 3rd respondent under registered documents bearing Nos.1666/99, 1667/99 and 1668/99 dt.19.07.1999 executed by the 3rd and 4th respondents in favour of petitioners 1, 2 and 4 and registered document No.1736 of 1999 executed on 24.07.1999 in favour of the 3rd petitioner by the 3rd and 4th respondents.

Summary

Issues Involved:
1. Validity of the transfer of immovable property under Section 281 of the Income Tax Act, 1961.
2. Adequacy of notice and procedural compliance under the Income Tax Act.
3. Bona fide nature of the petitioners' purchase of the property.
4. Authority of the Tax Recovery Officer to declare the transfer void.

Issue-wise Detailed Analysis:

1. Validity of the Transfer of Immovable Property under Section 281 of the Income Tax Act, 1961:
The petitioners challenged the order of the 2nd respondent, which declared the transfer of immovable property as void under Section 281 of the Income Tax Act, 1961. The court examined whether the transfer made by the 3rd and 4th respondents to the petitioners was valid. The 2nd respondent argued that the assessment proceedings against the 3rd respondent were already pending at the time of the property transfer, making the agreements void under Section 281 of the Act. The court noted that Section 281(1) of the Act would be applicable only when a demand is raised, and the assessee fails to pay, thereby becoming an assessee in default. The court concluded that since the sale deeds were executed before the 3rd respondent was declared in default, the transfer was not hit by Section 281(1).

2. Adequacy of Notice and Procedural Compliance under the Income Tax Act:
The petitioners contended that the impugned order was passed without notice to them, as required under the Income Tax Act and its Schedule. They argued that no notices calling for objections were issued to them before the proceedings were initiated. The court observed that the 2nd respondent issued notices to the occupants of the attached property, but the petitioners claimed they were unaware of any civil suits filed in their name. The court noted procedural lapses and emphasized the importance of following due process.

3. Bona Fide Nature of the Petitioners' Purchase of the Property:
The petitioners asserted that they were bona fide purchasers who had paid valuable consideration for the residential flats and had registered sale deeds executed in their favor. The court found that the petitioners' transactions were bona fide and for adequate consideration. The impugned order did not mention that the transactions were intended to defraud the revenue. The court emphasized that the petitioners' purchases were registered before the attachment order was issued, and thus, they were protected under the proviso to Section 281(1).

4. Authority of the Tax Recovery Officer to Declare the Transfer Void:
The court referred to the judgment in ICICI Bank Limited v. Tax Recovery Officer-I, where it was held that the Tax Recovery Officer is not competent to declare transfers void under Section 281 of the Act. The court reiterated that the declaration of voidity becomes automatic only after an attachment is made. The court concluded that the 2nd respondent's reliance on the encumbrance certificate, which did not reflect the sale deeds executed in favor of the petitioners, was not sufficient to declare the transfers void.

Conclusion:
The court set aside the impugned order dated 05.05.2009 in TR No.29/02/03-PRO-II passed by the 2nd respondent, to the extent of the properties of the petitioners. The court allowed the writ petition, emphasizing that the petitioners were entitled to the protection provided under Section 281(1) of the Income Tax Act, as their purchases were bona fide and for adequate consideration. The court highlighted the procedural lapses and the lack of authority of the Tax Recovery Officer to declare the transfers void. Pending miscellaneous petitions were closed, and no order as to costs was made.